Effective January 1, 2013, – unless Congress changes what is already on the books – your taxes are probably increasing. We shall see what happens with the November elections. As things stand now, there is:

  • An additional 0.9% tax on earned wages in excess of $200K for an individual and $250K for a married couple filing jointly
  • An additional 3.8% on unearned income, specifically the lesser of net investment income or the amount by which adjusted gross income exceeds $200K for an individual and $250K for a married couple filing jointly
  • The favorable long term capital gains rate is set to increase from 15% to 20% for any property sold after 2012

Of course, several categories of income are exempt from the surtax: tax-exempt municipal bonds, nontaxable veteran’s benefits, nontaxable sales of principal residences, distributions from certain qualified plans such as IRAs, 401(k) plans, 403(b) plans, pensions, profit-sharing and stock bonus plans, and qualified annuity plans. Accumulations within retirement accounts are also not subject to the surtax.


With respect to equity income, qualified corporate dividends enjoy a 15% federal tax rate, but that is also set to expire at year end when the maximum rate jumps to 39.6%. Add to that the new 3.8% Medicare surtax on unearned income and taxpayers could face an effective federal tax rate of 43.4% on dividend income. With the additional potential loss of itemized deduction limitations based on adjusted gross income, the effective federal tax rate on dividends could be 44.6%. And then there are state taxes.


In addition, the Alternative Minimum Tax (AMT) patch expired at the end of 2011. It needs to be retroactively fixed before the end of 2012, or the number of people hit with AMT taxes will jump from approximately 4 million to 30 million. Without the patch, AMT payments – owed by April 2013 – would reduce U.S. GDP by about 2%. Hopefully, Congress solves this during the lame duck session, November 7 to December 31, 2012. Theoretically, the new Congress could retroactively change the laws and fix AMT in 2013, but by then the extra financial burden will have panicked millions of Americans who have not saved for AMT and the IRS will have to rewrite its forms and instructions at the last minute.


Of course, there is much more detail and complication involved with the tax changes of 2013 and this is not an authoritative tax guide. This is merely a high level overview of some of the changes coming. None-the-less, as a consequence of the new taxes, we may see a little more end of the year volatility then usual as people shift assets and strategically sell investments to book gains or losses. Keep an eye on developing quantitative easing announcements from Bernanke and Draghi as well as political and election issues.



Michael Ashley Schulman, CFA

Managing Director